8. Reserve Requirements
(Fractional Reserve Banking)
Cash Reserve Ratio (CRR)
The amount of cash that the scheduled commercial banks are required to maintain with RBI with respect to their NDTL (on a fortnightly basis) is called CRR.
“In terms of Section 42(1) of the RBI Act, 1934 the Reserve Bank, having regard to the needs of securing the monetary stability in the country, prescribes the CRR for SCBs without any floor or ceiling rate”.
Statutory Liquidity Ratio (SLR)
The amount of reserves that the scheduled commercial banks are required to maintain with themselves on a daily basis in safe and liquid assets such as government securities, gold and cash with respect to their NDTL is called SLR.
Excess CRR balances are also treated as liquid assets for the purpose of SLR i.e., SLR can be maintained as cash balance with RBI.
Scheduled Commercial Banks are required to maintain SLR as per the Banking Regulation Act 1949. The ceiling on SLR is 40%.
What is NDTL?
Deposits of public are the liability of banks. The public’s demand deposits are demand liability of the bank and time deposits are time liability of the banks and the total demand and time deposits of the public is called ‘Net Demand and Time Liabilities (NDTL)’ of the banks.
Why are CRR & SLR important?
The CRR and SLR enable RBI to control the amount of money that banks can create and make public deposits safe and liquid.
It ensures that banks have a safe cushion of assets to draw on when account holders want to be paid.
In absence of the CRR and SLR requirements, to make more profits bank may lend most of the deposits and if there is a sudden rush to withdraw, banks will struggle to meet the repayments.
Who must maintain CRR & SLR?
All Commercial and Cooperative Banks (either scheduled or non-scheduled) are required to maintain CRR and SLR.
- For scheduled banks, the maintenance of CRR is governed through The Reserve Bank of India Act 1934.
- For Non-Scheduled banks CRR is governed through Banking Regulation Act 1949.
- Banking Regulation Act 1949 (Section 24) governs maintenance of SLR for all banks (scheduled and non-scheduled) commercial and cooperative.